The escalating Trade war between the United States and China has investors on edge, the stock market is reeling, and the most influential company on Wall Street may become a pawn if the two sides fail to take a step in the right direction.
The United States can hurt China in this trade war much more then China can hurt the United States given the massive differentials that exist in trade volumes. The differences between the Tariff increases on Friday and Monday offer an excellent example. Where the US Increased tariffs on $200B, China only did it on $60B. This is roughly a 3 to 1 ratio in favor of the United States, and it exemplifies the stronger influence that the United States has in these disputes.
Additionally, last year when China threatened to increase Tariffs in a retaliatory fashion, President Trump said that if they did, he would retaliate dollar for dollar. The conditions were slightly different then, but our understanding is that he still thinks the same way. President Trump believes that the recent Tariff increases on Friday were justified, it was punitive, and our understanding is that he believes additional Tariff increases are likely by the United States to maintain that punitive measure given what China’s has now decided to do in retaliation.
The chances that the United States responds with additional Tariff increases is therefore high, unless the reconciliation is political, and it may be. Trump may recognize that China needed to do something, and he may be willing to accept their actions as politically motivated, but not for long.
The United States can increase Tariffs much more than China is able to, and this puts China in a very awkward position. The action it took on Monday may very well be designed to save face given what happened on Friday, so it still appears to be strong in front of its people, but eventually China is going to run out of ammunition. If this goes back and forth, China will need to take drastic measures.
What might those be?
Last year the drastic measures being discussed involved such things as banning iPhone sales in China. Given the importance of Apple to the United States stock market, such a move might actually be the most influential option that China has if it really wants a fight.
If the banter escalates and both sides continue to hike until such time as China’s ability to retaliate dissolves, or reaches the point at which it will obviously dissolve, we believe that China will bring the threat of banning iPhone sales in China to the table again. We do not believe they will do it, but they will threaten to do it if their backs are against the wall.
Given the 3 to 1 ratio that is in favor of the United States in this trade war, China will need to use drastic measures to keep up if they intend to fight, and if push comes to shove we believe they will go there if they have to. They might shoot themselves in the foot in the process, but they may also believe that if they are able to cause enough problems for President Trump at this particular juncture that his ability to be re-elected will diminish significantly and whomever takes his place will be much more amicable to their demands in these trade negotiations.
China may very well be interested in stirring this pot as much as they can if they believe it will knock Trump out of office, and Apple may very well be a pawn, or better said a knight, in this game of Chess.
Given the situation, the question is, will Trump retaliate to China’s $60B Tariff increase. If he does, expect Apple to come into play soon thereafter.
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